Commentaries (some of them cheeky or provocative) on economic topics by Ralph Musgrave. This site is dedicated to Abba Lerner. I disagree with several claims made by Lerner, and made by his intellectual descendants, that is advocates of Modern Monetary Theory (MMT). But I regard MMT on balance as being a breath of fresh air for economics.

Friday, 31 January 2014

I agree
with Krugman 95% of the time, so I’m baffled
as to why he’s fallen for, and is still paying lip service to Lawrence Summers’s
secular stagnation nonsense.

In this
recent New
York Times article, and starting at the paragraph that begins “You may or
may not have heard…”, he argues that we are short of viable investments to
make, ergo investment spending is subdued, ergo aggregate demand is subdued,
ergo “the result is a persistent slump” as he puts it.

Well the
simple answer to that is that investment spending is not the only constituent of
aggregate demand. It doesn’t even make up a big percentage of GDP for most
countries. The average figure world-wide is roughly 20-25% of GDP.

So… if
demand is inadequate due to subdued investment spending, why notjust channel new money into household
pockets, then CONSUMPTOIN SPENDING will make up for the lost investment
spending? Or if you’re on the political left, you’ll want to see more emphasis
on public spending rather than household spending. Indeed, the latter cure for
the problem is incorporated in post
just below.

As to
the instabilities that derive from twits who make daft
investments, we can’t stop rich idiots behaving like rich idiots. So some
instability from that source may be inevitable. But at least we can ameliorate
the instabilities that derive from idiots borrowing from banks to make idiot
investments which then fail and bring banks down with them.

The way
to do that was set out by Milton Friedman decades ago in his book “A Program
for Monetary Stability”. And a system much the same as as Friedman’s is
currently being advocated by Lawrence
Kotlikoff.

Essentially
Friedman, Kotlikoff (and others) advocate having bank loans funded by ENTIRELY
by bank shareholders or other types of loss absorbers. That means it’s
impossible for banks to suddenly collapse, though the value of their shares
will fall if they make silly loans. And that means they dwindle to nothing over
a period of time, or they’re taken over.

As
Mervyn King put it in his Bagehot to Basel speech,
“we saw in 1987 and again in the early 2000s, that a sharp fall in equity values
did not cause the same damage as did the banking crisis. Equity markets provide
a natural safety valve…”.

But
unfortunately as soon as anyone suggests capital requirement improvements for
banks, bankers start muttering about economic growth being hit, and politicians
and regulators believe every word that comes from bankers. And I don’t blame
them. You can tell how honest, sincere and trustworthy bankers are from the
fact that they’ve laundered tens of billions for drug cartels, stolen billions
from customers in the UK under the PPI fiasco. And then there’s the $20bn that
J.P.Morgan have been fined recently. Clearly J.P.Morgan are to be trusted. Oh:
I forgot to mention NINJA mortgages and dodgy CDOs.

Here is
simple set of rules for optimising the size of the deficit and debt. It’s more
or less Modern Monetary Theory compliant, but not 100% compliant.

1. If
unemployment is excessive, then expand the deficit (or reduce the surplus).

Incidental
point: as Keynes made clear, a deficit can be funded either by borrowing or by
simply printing money. Quite what the point of borrowing is, is a bit of a
mystery. First, borrowing has a deflationary or anti-stimulatory effect (if it
has any effect at all). Now what’s the point of doing something
anti-stimulatory when you’re trying to impart stimulus? Darned if I know. Isn't
that evidence of schizophrenia?

Second,
what’s the point of borrowing money when you can print the stuff? The naughty
people who have their own back street printing presses for turning out forged
£20 notes don’t borrowing money: when they need money they just crack up their
printing presses (so I’m told). Their understanding of economics is clearly
superior to that of professional economists and finance ministers.

2.
However, if a deficit IS FUNDED via borrowing, and the rate of interest demanded
by creditors starts to rise too far, there is an easy solution: tell the
creditors to get lost.

That is,
as debt matures, instead of rolling it over, just print money and pay off the
creditors. That may well be too inflationary, in which case just raise taxes
and/or cut public spending so as counter the inflation.

Note
that the latter increased tax / reduced public spending would not, repeat not
reduce living standards (at least not to the extent that an economy is a closed
economy – i.e. to the extent that it doesn’t have dealings with other countries).
Reason is that the only purpose of said increased tax / reduced public spending
is to cut inflation. Put another way, there is no reason to assume any big
effect on REAL GDP.

Of
course, to the extent that an economy is OPEN, i.e. to the extent that it
borrows from abroad, obviously if foreigners can no longer get a nice rate of
interest by buying the debt of a given country, then those creditors will seek
yield elsewhere. And that will necessisate a devaluation of the currency of the
country concerned, which in turn will lead to a cut in its standard of living.

But that’s
just another reason for abstaining from borrowing, isn't it? See No.1 above.
That is, when a household borrows from some external source, that temporarily
raises the household’s standard of living. Then the household has to do some
work, earn some money and pay back the debt: that cuts its standard of living.
Same goes for countries.

Borrowing
makes sense if you don’t have cash to hand and if you have spotted an
investment that covers the cost of the interest. But that’s not what’s involved
when a country runs a deficit funded by borrowing.

3. The
above advocated “no borrowing” policy implies that interest rates are not
deliberately adjusted. Does that matter? The answer is “no”: a recent Fed study
showed that interest rate adjustments don’t work: at least it showed there is
little relationship between interest rates and investment spending. Moreover,
the optimum rate of interest is presumably the free market rate. I.e.
artificial adjustments to the rate will presumably lead to a misallocation of
resources.4. The above rules are also Positive Money compliant, as I understand PM's policies.

_________

P.S.
(same day). Rule No.5. If inflation is excessive and it looks like demand pull
inflation rather than cost push inflation, then cut the deficit / increase the surplus.

Thursday, 30 January 2014

Let’s assume a simple economy where
money comes in the form of monetary base issued by the government / central bank
machine, and in just sufficient quantities to induce citizens to spend at a
rate that brings full employment. No
interest is paid to holders of monetary base. We’ll also assume there are no
commercial banks: i.e. citizens bank with the central bank.

The “no commercial banks” assumption
might sound odd, but in fact when lending to government or paying taxes, final
settlement is always done in base money, not commercial bank created money. So
that assumption is not unrealistic.

Now let’s assume government wants to
make a public sector investment.

Government could attract funds from
citizens with a larger than normal stock of money (I’ll call them “hoarders”)
and offer them interest. But unfortunately that wouldn’t work. Reason is that
the investment spending would increase demand and we’ve already assumed full
employment. Thus the extra spending would be inflationary.

So even if government funded the
investment with borrowed money, it would still have to raise taxes so as to
ameliorate inflation. (A nice illustration of a point often made by MMTers,
namely that the purpose of tax is not to fund government, but to control
inflation. Actually that MMT point is a bit of an exaggeration, but it’s a nice
sort of “exaggeration to make point”.)

Anyway, getting back to the point
that government borrowing does not reduce taxation, you could of course argue
that hoarders who “lend” to government will then be short of their “rainy day”
stock of money and will thus save more so as re-stock with rainy day money. And
indeed, if they did save in that way, that would depress demand, which would
make room for the extra demand coming from government investment spending.

However, when lending to government,
lenders do not really lose access to their savings in that they can sell their
government bonds anytime for cash. And assuming any individual hoarder’s need to sell bonds to meet an unexpected need for cash occurs at a random point in time (which it almost certainly
does), then the need for that money by one hoarder will be balanced by another
hoarder’s desire to buy government debt.

In short, the process whereby
governments supposedly borrow to fund public investments is a farce: they can
go through the motions of borrowing to fund investments, but the reality is
that those investments are funded out of tax.

The only exception to the above
argument comes to the extent that government borrowing is funded by foreigners.
On the other had if we assume that citizens of country X buy a dollar of debt
issued by country Y for every dollar of debt issued by country X and bought by
citizens of country Y, then the above argument holds.

But even to the extent that the
latter “X and Y” point does not apply, the argument in the above paragraphs, if
it is correct, is an almighty dent in the whole idea that government borrowing
is a good idea.

________

P.S. (same day). In
Britain, as in other countries, households with anything near average incomes
and average net assets don’t normally buy or sell government bonds directly.
But in Britain they can easily do so indirectly via “National Savings and Investments”.
NSI has about £100bn of depositors money invested in government stock, and has
about 20 million depositors.

Non-peer reviewed (or only lightly peer reviewed) publications. The coloured clickable links below are EITHER the title of the work, OR a very short summary (where I think a short summary conveys more than the title).

i) The above is not a complete list in that earlier versions of some papers have been omitted. For a more complete list see here, and “browse by author” (top of left hand column).

ii) 7 deals with a wide range of alleged reasons for government borrowing, including Keynsian borrow and spend. 6 is an updated version of the "anti-Keynes" arguments in 7. 5 is an updated version of 1, which in turn is an updated version of 4.

______________

.

Bits and bobs.

.

As I’ve explained for some time on this blog, the recently popular idea that “banks don’t intermediate: they create money” is over-simple. Reason is that they do a bit of both. So it’s nice to see an article that seems to agree with me. (h/t Stephanie Schulte). Mind - I've only skimmed thru the intro to that article.________

Half of landlords in one part of London do not declare rental income to the tax authorities. I might as well join in the fun. I’ll return my tax return to the authorities with a brief letter saying, “Dear Sirs, Thank you for your invitation to take part in your income tax scheme. Unfortunately I am very busy and do not have time. Yours, etc.”________

Simon Wren-Lewis (Oxford economics prof) describes having George Osborne in charge of the economy as being “similar to someone who has never learnt to drive, taking a car onto the highway and causing mayhem”. I’ll drink to that.

Unfortunately SW-L keeps very quiet, as he always does, about the contribution his own profession made to this mess. In particular he doesn’t mention Kenneth Rogoff, Carmen Reinhart or Alberto Alesina – all of them influential economists who over the last ten years have advocated limiting stimulus (because of “the debt”) if not full blown austerity.________

Plenty of support in the comments at this MMT site for the basic ideas behind full reserve banking, though the phrase “full reserve” is not actually used.________

Old Guardian article by Will Hutton claiming the UK should have joined the Euro. Classic Guardian and absolutely hilarious.________

One of the first “daler” coins (hence the word “dollar”) weighed 14kg.!!! Imagine going shopping for the groceries with some of those in your pocket, or should I say “in your wheelbarrow”. (h/t J.P.Koning)________

Moronic Fed official reveals that GDP tends to rise when population rises. Next up: Fed reveals that grass is green and water is wet….:-)________

Fran Boait of Positive Money says the Bank of England "has no capacity to respond to a future crisis, and that puts us in an extremely dangerous position." Well certainly there are plenty of twits at the Treasury and at the BoE who THINK responding will be difficult. Actually there's an easy solution: fiscal stimulus, funded (as suggested by Keynes) by new money. Indeed, that’s what PM itself advocates. But it’s far from clear how many people in high places have heard of Keynes or, where they have heard of him, know what his solution for unemployment was.________

The US debt ceiling has been suspended or lifted 84 times since it was first established. You’d think that having made the Earth shattering discovery 84 times that the debt ceiling is nonsense, that debt ceiling enthusiasts would have learned their lesson, wouldn’t you? I mean if I got drunk 24 times and had 24 car crashes soon afterwards, I’d probably get the point that alcohol causes car crashes…:-) As for getting drunk 84 times and having 84 car crashes, that would indicate extreme stupidity on my part. No?________

The US Treasury has the power to print money (rather in the same way as the UK Treasury printed money in the form of so called “Bradburies” at the outbreak of the first World War).________

“Payment Protection Insurance” was a trick used by UK banks: it involved surreptitiously getting customers to take out insurance against the possibility of not being able to make credit card or mortgage payments. UK banks have been forced to repay customers billions. But that’s just one example of a more general trick used by banks sometimes called “tying”: forcing, tricking or persuading customers to buy one bank product when they buy another. More details here on the Fed’s half-baked attempts to control tying in the US.________

The farcical story of economists’ apparent inability to raise inflation continues. As I’ve long pointed out, Robert Mugabe knows how to do that. In fact Mugabe should be in charge of economics at Harvard: he’d be a big improvement on Kenneth Rogoff, Carmen Reinhart and other ignoramuses at Harvard.________

I’ve removed comment moderation from this blog. The only reason I ever implemented it was so as get rid of commercial organisations advertising something and posing as commenters. When doing that I noticed comments were limited to people with Google accounts for some strange reason. Removed that as well. ________

Article on money creation by Prof Charles Adams, who as far as I can see is a professor of physics at my local university – Durham. I can’t fault the first half of his article, but don’t agree with the second half which claims both publically and privately issued money are needed because we have a public and private sector. I left a comment.

Adams is nowhere near the first physicist to take an interest in money creation. Another is William Hummel. These “physicist / economists” are normally very clued up (as befits someone with enough brain to be a physicist).________

.

MUSGRAVE'S LAW SOLVES THE FOLLOWING PROBLEM.

The problem. Deficits and / or national debts allegedly need reducing. The conventional wisdom is that they are reduced by raising taxes and / or cutting government spending, which in turn produces the money with which to repay the debt. But raised taxes or spending cuts destroy jobs: exactly what we don’t want. A quandary.

The solution. The national debt can be reduced at any speed and without austerity as follows. Buy the debt back, obtaining the necessary funds from two sources: A, printing money, and B, increasing tax and/or reduced government spending. A is inflationary and B is deflationary. A and B can be altered to give almost any outcome desired. For example for a faster rate of buy back, apply more of A and B. Or for more deflation while buying back, apply more of B relative to A